Rockwell Automation, Inc.

Thank you for holding, and welcome to Rockwell Automation's quarterly conference call. I need to remind everyone that today's conference call is being recorded. Later in the call, we will open up the lines for questions. If you have a question at that time, please press star 1. At this time, I would like to turn the call over to Jessica Caracos, Head of Investor Relations. Ms. Caracos, please go ahead.

Thanks, Amy. Good morning, and thank you for joining us for Rockwell Automation's fourth quarter fiscal 2020 earnings release conference call. With me today is Blake Morett, our chairman and CEO, Patrick Gores, our CFO, and Steve Etzel, our CFO-elect. Our results were released earlier this morning, and the press release and charts have been posted to our website. Both the press release and charts include, and our calls today will reference, non-GAAP measures. Both the press release and charts include reconciliations of these non-GAAP measures. A webcast of this call will be available at that website for replay for the next 30 days. For your convenience, a transcript of our prepared remarks will also be available on our website at the conclusion of today's call. In addition, please file this 8K and have posted supplemental information on our website related to our new business segments and adjusted earnings definition. Before we get started, I need to remind you that our comments will include statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a wide range of risks and uncertainties that are described in our earnings release and detailed in all of our SEC filings. So with that, I'll hand the call over to Blake.

Thanks, Jessica, and good morning, everyone. Thank you for joining us on the call today. Before we begin discussing our results and outlook, I'd like to make a few opening remarks. I first want to address Patrick's recent announcement that he will be leaving Rockwell to start us the company has continued its long legacy of financial discipline and delivering superior share owner returns and we wish him well in his next pursuit many of you know Steve Edsel will be stepping in a CFO on an interim basis Steve has been with us for over 30 years and over these years has run investor relations Treasury and corporate FP&A the board and I have full confidence in he will reinforce a strong financial framework and continued commitment to superior shareowner returns. Patrick and Steve are ensuring a very smooth transition while we consider internal and external candidates for a permanent successor. I also want to send my deepest thanks to the thousands of employees who have been working under very difficult conditions, including the temporary pay cuts we implemented in May to help us preserve jobs and to serve our customers during the pandemic. These cost actions enabled us to protect our company's financial strength and allowed us to continue making important, targeted investments to drive our future growth. Now, with business conditions gradually improving, we will reverse the temporary pay reductions by the end of November, one month earlier than expected. In addition, our guidance for next year assumes a return to a fully funded bonus plan. Because of our employees' hard work and dedication, we have never been so well positioned for what lies ahead. This is another testament to the type of culture we have at Rockwell, and I couldn't be prouder. Turning now to our Q4 results on slide three. While business conditions remain difficult relative to a year ago, we are pleased with the steady improvement we're seeing. In Q4, total reported sales declined by 9% versus the prior year. Organic sales were down about 12% versus prior year, but grew 10% sequentially. Product sales outperformed our expectations and were driven by better than expected results in drives and motion. Motion performance was led by our independent cart technology. where we received the largest single order in Rockwell Automation's history. We won this multi-year project from the U.S. Navy based on a need for precise, highly responsive motion control, not available with traditional systems, and on Rockwell's long track record as a dependable U.S. supplier. Independent cart provides a new way for us to add value and drive growth. You'll be hearing more about it and other innovative technologies at our upcoming Investor Day on November 17th. Turning to information solutions and connected services, organic sales were up low single digits versus prior year. ISCS orders grew double digits over the prior year in both software and connected services. ISCS sales reached approximately $400 million in fiscal 20 on an organic basis and were well in excess of that when including all of our recent inorganic investments. Demand for software sold as a result of our PTC partnership is also increasing rapidly as we enter the new fiscal year. And we're very happy with the recent extension and expansion of this relationship. Together with PTC, we added over 200 new customer logos in fiscal 2020, and deal sizes in our information solution software business continue to grow. The synergies of our combined offering are very evident to customers. In connected services, our recent Calypso acquisition is doing particularly well and is helping us further differentiate. Calypso was already contributing to some large competitive wins, and they just had the best orders quarter in their history. include a three-point positive contribution from inorganic investments, led by our Sensia joint venture, along with the Calypso and Awesome acquisitions. Total backlog in the quarter grew double digits versus the prior year and grew high single digits on an organic basis. Our Q4 solutions and services book-to-bill was 0.87, and full-year book-to-bill was over one. This solutions and services book to build does not include the large independent cart order we received from the U.S. Navy. Turning to profitability, strong segment operating margin performance of over 20% in the quarter was flat with last year on lower sales underscoring our increasing business resilience. Free cash flow was also very strong. reinforcing our solid balance sheet and liquidity position. Let's now turn to slide four, where I will provide a few highlights of our Q4 organic and market performance. Our discrete market segment declined approximately 10%, with automotive performing better than we expected, driven by stronger MRO and project sales. Among the more notable projects in the quarter was a significant OT cybersecurity win in Europe with one of the major German car companies. And in electric vehicles, we saw momentum continue in the industry with battery manufacturers and brand owners. We're excited by recent announcements from both new and established automakers as they focus on production of compelling new EV offerings. In semiconductor, we had another very strong quarter and grew high single digits versus the prior year. This vertical is benefiting from a variety of secular tailwinds, such as the rise of smart devices and the resulting Internet of Things, along with the need for faster data centers and the adoption of 5G wireless technology. In addition to facilities management, which has been a strong foundation for us, we see an opportunity for our material handling technology as well as our software. In e-commerce, we had a significant expansion win at Klustermans, one of the largest and most important suppliers to the global e-commerce industry. This is another industry with long-term secular tailwinds that will continue to invest in automation and industrial software to support its tremendous future growth. Turning now to our hybrid market segment. This segment declined a little less than 5% and outperformed the discrete and process industry segments. Food and beverage and life sciences each declined low single digits for both the quarter and for the year. Packaging OEMs had another strong quarter and delivered double digit growth versus the prior year. We believe these markets will outperform in fiscal 21. Eco-industrial outperformed other industries in the quarter, driven by growth in water, where we continue to benefit from a differentiated offering that integrates control, power, and industrial software. Tire and rubber was down double digits, but performed in line with our expectations. In the quarter, we had key wins at important strategic accounts, including Cooper Tire, which continues to strengthen its global track and trace capabilities to support the company's long-term growth plans. They chose factory-taught software because of our strong MES and analytics capabilities and our differentiated ability to connect to both Rockwell and non-Rockwell control platforms. Once again, a strong software portfolio, our ecosystem of best-of-breed partners, and our expertise in connecting diverse manufacturing environments were all important reasons Rockwell won this very competitive project with Cooper Tire. Process markets were down approximately 20%. Oil and gas was a little weaker than we expected, but that was partially offset by better-than-expected performance in most other process markets, like mining and pulp and paper. Sensia held up fairly well during the quarter and continues to demonstrate their competitive differentiation. Turning now to slide five, and our organic regional sales performance in the quarter. North America organic sales declined by 12% versus the prior year. Business conditions improved through the quarter, particularly in products, where orders significantly exceeded our expectations. While our large independent cart win was part of that result, we also saw great software orders within information solutions that more than doubled versus the prior year, creating strong momentum entering the new fiscal year. In EMEA, sales declined 12%, largely due to CapEx delays. These were partially offset by strong growth in water. We also saw growth in life sciences and PPE-related machine builder business. Sales in the Asia-Pacific region declined 9%, largely due to declines in end-user business within automotive and mass transit. Double digit growth in mining and life sciences partially offset those declines. China sales declined, but orders grew mid single digits year over year in the quarter. Latin America declines were led by mining and oil and gas. Let's now turn to slide six to review highlights for the full year. It's an understatement to say that fiscal 20 turned out very different than the plans we discussed together at a great investor day during an incredible automation fair in Chicago last November. The shadow of the pandemic soon created unique challenges, but I'm proud of our ability to respond while taking big steps forward in the execution of our strategic vision. We kept the safety of our employees at the top of our list, and continue to provide dedicated service to our customers, many of whom are producing the food, water, protective gear, and medicine that keep us going. The pandemic has focused us all on what's truly important. We took thoughtful actions to manage costs through this pandemic, while at the same time protect strategic investments, including some very big internal development projects. And you can see those investments drive the performance of our software business, which reached over $500 million in revenue in fiscal 20 and was one of the best performing areas of our business in both orders and sales this year. We deployed over $500 million for inorganic investments that contributed almost four points to our top line growth. and we deployed over $700 million in cash for dividends and repurchases enabled by our strong free cash flow. I am tremendously proud of what we've accomplished in fiscal 20, and I'm excited about the resulting momentum as we enter fiscal 21. Turning now to our outlook on slide seven. As I said earlier, we saw strong sequential momentum exiting the year. Industrial production is projected to grow in the second half of our fiscal year, so it may take a couple of quarters for us to climb back to year-over-year sales growth from the Q3 trough in fiscal 20. We expect double-digit year-over-year growth during our third and fourth quarters. Of course, we're all closely monitoring global infection levels related to this pandemic, but we are not assuming a widespread shutdown of customer manufacturing operations. We expect reported sales to grow about 7.5% at the midpoint of the guidance range, including 5% of organic growth and over a point of growth from our fiscal 20 and fiscal 21 acquisitions to date. In addition, we are adopting annual recurring revenue as an important metric for the company and have added ARR as a performance metric in our incentive compensation framework beginning this year. ARR is expected to grow double digits in fiscal 21 after showing over 6% growth in fiscal 20. This is further evidence of our ability to build an even more resilient business model. Adjusted EDS is expected to reach $8.65 at the midpoint, which is up 10% from last year's fiscal 20 results. We're targeting free cash flow conversion of 100%. A more detailed view into our outlook by end market is found on slide 8. I won't go into the details on this slide, but as you can see, We expect positive organic sales growth in all of our key end markets next year, with the exception of oil and gas. With that, let me now turn it over to Patrick, who will elaborate on our fourth quarter and fiscal year 2020 financial performance. We'll then have Steve discuss our fiscal 2021 outlook in his remarks. Patrick? Thank you, Blake, and good morning, everyone. I'll start on slide nine, fourth quarter key financial information. Sales, segment margin, adjusted EPS, and free cash flow were all better than expected in the fourth quarter, mainly as a result of better organic sales growth and productivity. Organic sales improved as the quarter progressed and were up 10% sequentially versus Q3. Compared to last year, Q4 organic sales were down 12%, and acquisitions contributed just over 3% to total growth. Currency translation was a smaller headwind than expected and decreased sales by 0.3 points. Overall company backlog increased year over year in the quarter. Backlog for our short cycle products was at double digits from a year-over-year and sequential perspective, even excluding the very large independent cart order Blake referred to earlier. Segment operating margin was 20.2%, the same as last year. The negative impact of lower sales was partially offset by a combination of temporary and structural cost actions. Fourth quarter results included about $10 million of restructuring charges, which are expected to yield over $15 million in additional annualized structural cost savings. Most of these savings will be realized in fiscal 21. General corporate net expense was $22 million, pretty much in line with what we expected. As I mentioned earlier, adjusted EPS of $1.87 was better than expected mainly as a result of better organic sales, productivity, and a slightly lower tax rate. I'll cover a year-over-year adjusted EPS bridge on a later slide. The adjusted effective tax rate for the quarter was 15%, a bit lower than we expected due to a slightly different geographic mix of our pre-tax income. Free cash flow performance remains strong. We generated over $300 million of free cash flow in the quarter, well over 100% conversion on adjusted income. Note that this result includes a voluntary $50 million pretax contribution made to the U.S. pension plan. This voluntary pension contribution was not reflected in our prior guidance. Slide 10 provides a sales and margin performance overview of our operating segments. Organic sales of both segments improved significantly compared to last quarter. Both segments were up about 10% on an organic basis compared to Q3, though organic sales remained lower compared to last year. Segment margin of both segments increased over 300 basis points compared to Q3, mainly due to higher organic sales, but also as a result of cost control, including a full quarter benefit of our cost reduction actions and generally improving operating efficiencies. Compared to last year, architecture and software margins were at 100 basis points, despite the impact of lower sales, mainly as a result of our cost actions, including lower incentive compensation. Segment margins for the control product and solution segment declined 60 basis points compared to last year, with cost actions offsetting most of the impact of lower organic sales. The next slide, 11, provides the adjusted EPS walk from Q4 fiscal 19 to Q4 fiscal 20. As you can see, core performance was down about 15 cents on a 12% organic sales decline. This implies core earnings conversion, that is, excluding the effects of acquisitions and currency, of a little below 20%, which is a bit better than the outlook I shared with you in July. A positive adjusted EPS contribution from acquisitions is offset by unfavorable currency impacts. Slide 12 provides key financial information for full-year fiscal 20. After a good start to the fiscal year, We experienced significant year-over-year sales declines in the second half as a result of the COVID-19 pandemic. Organic sales declined 8% for the fiscal year. Our cost reduction actions protected key investments and helped to partially mitigate the impact of lower sales. We selectively increased investments in some of our highest priority areas. R&D expense was about flat compared to fiscal 19, and R&D percent of sales increased further to 5.9% of sales in fiscal 2020. Full-year segment margin remained at about 20% compared to record 22% segment margins last year, and adjusted EPS was down 11%. Free cash flow performance remained strong, and excluding the $50 million voluntary pension contribution in fiscal 20 was flat compared to last year. Free cash flow conversion was over 110% of adjusted income. And finally, return on invested capital remained well above our target of over 20%. Before I turn it over to Steve, I want to mention that we deployed about $1.3 billion of capital towards acquisitions, dividends, and sharing purchases in fiscal 2020. Our capital structure and liquidity remain very strong. At September 30, our fiscal year end, cash on the balance sheet was over $700 million, and our total debt was about $2 billion. During the fourth quarter, we paid off the $400 million term loan that we executed earlier in the year, and our net debt to EBITDA ratio at September 30 was 1.0. With that, Steve.